Rudi’s View: Qantas, AMP, Infomedia And Lovisa

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Favourite theme-exposures and sector top picks from stockbrokers post the February reporting season.

By Rudi Filapek-Vandyck, Editor FNArena

Portfolio recalibration. We don't often hear about it, but we can be 100% certain that's what is happening, a lot, behind the curtains of the 2021 share market volatility.

Assuming the bond market is not yet ready to lay low, but the economic recovery goes on uninterrupted, this year's momentum trade should continue to favour:

-Cyclicals over Defensives
-Cheap & Value over Quality and Growth
-Small Caps over Large Caps

Of course, the above switch in market momentum has already been in place since late last year. The public debate will therefore concentrate on how long this aberration from the past five years or so will/can/should last? The answer probably lays with how quickly portfolio re-adjustments can be executed, and how much damage this will/can inflict on last year's winners.

The dilemma for investors thus becomes: do I hold on to last year's winners, in the knowledge there is not necessarily anything wrong with the underlying companies I hold, and as certain as day follows night, portfolio switching will eventually have run its course? Or do we abandon losers and join the bandwagon of this year's new momentum trade?

The answer, I believe, probably lays somewhere in the middle. In particular given many a quality stock is already down -25% or more over the past few weeks. Conviction and an iron stomach may be needed for longer, though.

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Those investors looking to re-calibrate their own portfolio, partially or otherwise, might take some inspiration from UBS's recent strategy update. In it, UBS strategists revisited the investment themes they believe are most dominant in this year's landscape, with favourites and best-to-avoid suggestions included.

Theme: Value stocks

Most preferred: Qantas ((QAN)), Downer EDI ((DOW)) and GrainCorp ((GNC))
Negatively viewed: Air New Zealand ((AIZ)), Scentre Group ((SCG)) and Vicinity Centres ((VCX))

Theme: Housing market

Most preferred: James Hardie ((JHX)), Boral ((BLD)), Super Retail ((SUL)), Adairs ((ADH))
Negatively viewed: JB Hi-Fi ((JBH))

Theme: Mining Services

Most preferred: Downer EDI
Negatively viewed: none

Theme: Defensive Growth

Most preferred: Charter Hall ((CHC)) and ResMed ((RMD))
Negatively viewed: Ramsay Health Care ((RHC)), Fisher & Paykel Healthcare ((FPH)) and Cochlear ((COH))

Theme: Income Stocks

Most preferred: APA Group ((APA)), Telstra ((TLS)) and Charter Hall
Negatively viewed: Atlas Arteria ((ALX)), ASX ((ASX)), Scentre Group, Vicinity Centres

Theme: Offshore Earners

Most preferred: James Hardie, Sims ((SGM)), Boral, Aristocrat Leisure ((ALL)) and ResMed
Negatively viewed: Domino's Pizza ((DMP)), Atlas Arteria, Brambles ((BXB)), Ramsay Health Care and Cochlear

Theme: Vaccine & Demand Rebound

Most preferred: Super Retail, Aristocrat Leisure and Nine Entertainment ((NEC))
Negatively viewed: InvoCare ((IVC)) and Atlas Arteria

Theme: Vaccine & Demand Rescue

Most preferred: Qantas
Negatively viewed: Air New Zealand, Scentre Group and Vicinity Centres

Theme: Covid & Demand Boost

Most preferred: ResMed and Collins Foods ((CFK))
Negatively viewed: Domino's Pizza, Ramsay Health Care, JB Hi-Fi and Fisher & Paykel Healthcare

Theme: Covid & Structurally More Demand

Most preferred: Charter Hall
Negatively viewed: none

Theme: China

Most preferred: IGO ((IGO)) and Sims
Negatively viewed: Western Areas ((WSA)) and Rio Tinto ((RIO))

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Another route to find inspiration is by looking back at the February reporting season. It's now well and truly behind us, but this year's script, blurred and ripped apart by rising bond yields and an appreciating Aussie dollar, has not necessarily rewarded the best performers with the most solid outlook.

Strategists at stockbroker Morgans have selected four major themes for the year ahead, including with best exposure suggestions:

Theme: Resilient Structural Growth

Most preferred: NextDC ((NXT)), Breville Group ((BRG)), ResMed, Magellan Financial ((MFG)), Universal Store Holdings ((UNI)), and Zip Co ((Z1P))

Theme: Global Reflation

Most preferred: Santos ((STO)), Macquarie Group ((MQG)), Ansell ((ANN)), Aristocrat Leisure, Incitec Pivot ((IPL)), Nufarm ((NUF)), and Lovisa Holdings ((LOV))

Theme: Key Vaccine Beneficiaries

Most preferred: Sydney Airport ((SYD)), Corporate Travel Management ((CTD)), Alliance Aviation Services ((AQZ)), and Baby Bunting ((BBN))

Theme: Income Upside

Most preferred: Westpac ((WBC)), BHP Group ((BHP)), Aurizon Holdings ((AZJ)), Coles Group ((COL)), and Aventus Group ((AVN))

Morgans has also updated its list of Best Ideas, now comprising of 43 ASX-listings (too much to repeat here) with all of the above mentioned names included. A few that might not necessarily be on investors' radar include: QBE Insurance ((QBE)), TPG Telecom ((TPG)), Eagers Automotive ((APE)), Redbubble ((RBL)), Booktopia Group ((BKG)), Jumbo Interactive ((JIN)), Volpara Health Technologies ((VHT)), Mach7 Technologies ((M7T)), Acrow Formwork and Construction Services ((ACF)), People Infrastructure ((PPE)), Strandline Resources ((STA)), Ramelius Resources ((RMS)), and HomeCo Daily Needs REIT ((HDN)).

An interesting observation was made by Morgans strategists in that favourite picks performed overall well throughout the February reporting season, but in most cases share price gains were made before the actual results release occurred.

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Small cap analysts at UBS have done the hard yakka, comparing earnings forecast adjustments with valuations, growth projections, dividend yield and balance sheet health, and ultimately decided their top three stocks for most upside post February consists of Adore Beauty ((ABY)), Infomedia ((IFM)) and Imdex ((IMD)).

Their least preferred top three (most downside) lists Japara Healthcare ((JHC)), InvoCare ((IVC)) and Servcorp ((SRV)).

UBS prefers to refer to small cap stocks as Emerging Companies and its recommended exposures are (apart from the three already mentioned): Adairs, Autosports Group ((ASG)), Bapcor ((BAP)), Breville Group, Collins Foods, Eclipx Group ((ECX)), EML Payments ((EML)), GrainCorp, IDP Education ((IEL)), NextDC, Select Harvests ((SHV)), Super Retail, TechnologyOne ((TNE)), United Malt Group ((UMG)), and Virtus Health ((VRT)).

The team also highlighted a number of names that underperformed in reporting season, but which should see a better operating environment over the next 6-12 months: Infomedia, Altium ((ALU)), NRW Holdings ((NWH)), and Perenti Global ((PRN)).

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Post February all investors have on their mind is rising bond yields and what it possibly means for their portfolio and the world tomorrow, but a number of brokers has nevertheless made the effort to publish specific sector reports.

Diversified Financials analysts at Citi this week grabbed that opportunity to make a non-consensus call on Link Administration ((LNK)) with the fresh Buy rating heavily reliant on the company realising value from its equity stake in PEXA. Citi continues to see rather tepid growth for the years ahead, albeit there should be "growth".

Over at Credit Suisse, sector analysts prefer Afterpay ((APT)) most among diversified financials, while Perpetual ((PPT)) is the number one favourite among asset managers and with IOOF Holdings ((IFL)) beating Hub24 ((HUB)) and other financial platform operators.

The team at UBS, however, retains a clear preference for Challenger ((CGF)) in the sector with AMP ((AMP)) still least preferred.

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Goldman Sachs sees an improving background for mining services providers and its top three Buy rated companies are ALS Ltd ((ALQ)), Orica ((ORI)) and Emeco Holdings ((EHL)).

Sector analysts at Macquarie point out February has been a tough reporting season for the sector, with many still reporting weak performances, but Macquarie agrees with the awakening momentum that should put this sector firmly in the basket of covid losers turning into winners this year.

Macquarie's sector favourities, in order of preference, are Downer EDI first, followed by Worley ((WOR)), Monadelphous ((MND)), and Cimic Group ((CIM)).

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JP Morgan has nominated Transurban ((TCL)) as its top pick among infrastructure exposures and Qantas as most preferred in the transport sector.

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When it comes to listed property owners, Macquarie continues to prefer the funds managers in the sector most (Goodman Group ((GMG)) and Charter Hall), followed by Dexus ((DXS)) and Mirvac ((MGR)).

Over at Morgan Stanley, property sector analysts have come to the view that listed owners of retail malls might be a great way to play the snapback in the domestic economy. Most preferred for this strategy is Scentre Group, while Shopping Centres Australasia ((SCP)) is most preferred among smaller mall owners.

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One of the stand-out performing sectors in February were the retailers, discretionary retailers in particular, with stockbroker Morgans observing the market has remained quite rational in its response to many great operational performances by not fully pricing in what have most likely been peak-conditions for many.

While the sector is likely to continue enjoying multiple consumption headwinds, the broker believes the sector will somewhat remain under pressure as investors are trying to assess what follows next for the sector. Top picks for the sector, according to Morgans, are Lovisa Holdings, Universal Store Holdings, Baby Bunting, Breville Group, and Adairs.

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The most unusual observation throughout the recent reporting season is that healthcare stocks for once were not among the best performers, despite the fact most large cap companies in the sector once again forced analysts to lift earnings estimates for the years ahead.

The second unusual observation is that CSL ((CSL)), for once, did not force analysts to lift forecasts (though its result was much better than expectations; it was all about the medium-term impact from less plasma collection).

Credit Suisse's healthcare sector analysts believe the general weakness in share prices is opening up great opportunities for investors who can look through short-term momentum, which remains negative for the sector.

Credit Suisse three large cap sector favourites are ResMed, Ansell ((ANN)), and Sonic Healthcare ((SHL)).

Healthcare analysts at Macquarie saw most companies reporting in-line with expectations, but no changes occurred to the list of sector favourites which has Cochlear on top, followed by Ramsay Health Care and Integral Diagnostics ((IDX)), Healius ((HLS)), and Estia Health ((EHE)). The latter is an aged care services provider, which is not always included in the sector at other brokerages.

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)  

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